In this article we will discuss about the degree of monopoly power.

Different writers have devised different criteria to measure the monopoly power of a seller. A. P. Lerner has evolved a formula to measure the degree of monopoly power of seller. In his opinion, a firm produces an ideal output at which P = MC. The divergence between the actual and the ideal output measures the extent of influence of a seller over supply and price. According to him, this divergence is equal to P – MC/P. But MC will always be equal to MR. So, the above formula may be rewritten as P – MR/P.

If elasticity is introduced and e_{p} = the efficient of price elasticity of demand, we get

P – MR/P = P – P (1 – 1/e_{p}) = 1/e_{p}

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[Since MR = P (1 – 1/e_{p})]

So the degree of monopoly power can be measured by the inverse of the elasticity of demand. In a market where elasticity of demand is infinite, its inverse will be zero and there will be no monopoly power. On the other hand, in a market where elasticity of demand is zero, the monopoly power will be infinite. In between these two extremes the degree of monopoly power will depend on the variation of price elasticity of demand.

But Lerner’s Index has been criticised on the ground that the measurement of divergence between actual and ideal output with his formula is impracticable. Moreover, his formula cannot measure product differentiation, service competition, etc.

Some writers, however, suggest the measures like concentration ratio (i.e., the fraction of total market sales controlled by the largest group of sellers) or persistent high profit rates. But, according to R. G. Lipsey, none of these is an ideal measure of the degree of monopoly power.